There are two questions I ask when giving presentations on money management. Where do you think you are (financially)? And where are you really?
Before we start making changes to improve our finances, we should take a look at what our money beliefs are. Shifting the way we think about money can make it much easier to change our habits.
The question, “Where do you think you are?” requires you to draft an outline of what you think your expenses are. In some cases you may know the amounts. You likely know what your rent or mortgage payment is, how much you pay for insurance or your cell phone, but others (your flexible and occasional expenses) are generally estimated. These would include groceries, gas, entertainment, gifts and car repairs, to name a few.
Quick quiz! Do you think people under-estimate or overestimate these expenses?
If you said under-estimate, you are correct. They are almost always underestimated. And it’s difficult to put a plan together with the wrong data.
My preferred question is, “Where are you really?” This requires taking the actual data available (or creating it if it’s not available) to determine where your money is actually going. To say this is an enlightening exercise for most is an understatement. More often than not, when given this exercise, a client comes back and shares how eye-opening it was for them.
Keeping track of your money, or “tracking your spending” is arguably one of the most important things you can do for your financial well being. And it can be one of the most challenging as it requires a consistent approach to make it an effective part of your spending plan.
Let’s discuss in more detail just why this is so important.
I’m sure you’ve heard the saying, “Information is power”. This is the number one reason why tracking is so important. It gives you valuable information that then allows you to make decisions.
“What type of decisions?” one might ask. Here are some examples:
- Change your grocery shopping habits to reduce the amount you spend on groceries
- Switch your home to a different type of heating system
- Determine when it’s time to replace your car based on maintenance costs
- Figure out much money you can designate to savings and investments, or what expenses you can decrease to redirect more money towards your goals.
I could go on but I want to get to the next part.
Let’s assume you implement some of the changes above. You decide to grocery shop less often and buy more each time you shop and to install a heat pump so you can cut back on oil costs. How will you know the changes are positively impacting your bottom line?
Information is power! By knowing what you spent before and knowing what you are spending after, you can determine if the decisions you are making are benefiting you.
Ok, now that we have covered that part, let’s start talking about the how. There are many ways to track your expenses. And there is no right or wrong way. Something is better than nothing, so start with what works best for you and if that isn’t getting you the results you want, try something new.
Just before we get into the methods, I want to offer this starting point: You need a good year’s worth of data to give you the information you need to start. Why? Because you want to account for fluctuation and be able to average out your spending.
As an example, I consistently spend more on groceries in May and December. December I understand, but May? I have no idea, but, every year, consistently, I spend quite a bit more in May. On average, I spend approximately $800 per month for groceries and that has increased by about $200 per month each year for the past 7 years. That’s good information to have. Depressing, but good to be aware.
You also want to be aware of expenses that do not occur every month and determine a yearly amount that you spend. The two best examples are car repairs and gifts. Generally we think of these in terms of yearly spending versus monthly and then determine the monthly average.
Ok, let’s get to the four methods:
Method #1 – Look Into the Past
You can go back and look at any past bank or credit card statements. I don’t know about you but the idea of combing through every bank and credit card statement for 12 months and summarizing what I spent is overwhelming to me. And there is one big pitfall to this method, you won’t capture cash spending. The best you can do is take all cash advances and lump it all together as cash spending but will lose the actual data of where it went.
Pro tip: you can download the transactions into a spreadsheet or money management program and sort and categorize it that way.
Method #2 – Pen & Paper
Computers not your thing? No worries! It will work just fine if you keep track of your money on paper. With this method, you keep your receipts (yes, all of them), separate them by the categories you establish, add them up each month and keep a written record. Over time, you get a yearly snapshot.
Pro tip: grab yourself an accordion file folder or a few envelopes and label them with the most common expenses: food, gas, entertainment, pets, etc. and put each receipt in its appropriate category. That will save time when adding them up.
Method #3 – Befriend Your Computer
Using a spreadsheet or computer program can make the task less daunting. For example, our Daily Spending Log helps you keep track of your money on Excel. You can download it and enter in what you spend each day and simply add it up at the end of the month.
You could then set up a spreadsheet to enter in each month’s expenses, totalling them by year, to give you the yearly total.
If you want to get more technically, you can use a money management/accounting program such as Mint (more on that in a moment), Quickbooks or YNAB to set up a plan, track results, create charts and more.
Pro tip – you can download your transactions from most banks into a compatible file and import the data into a third-party program.
Method #4 – Automate It
And finally, my favourite method. I like to do as little as possible for maximum effect. Automating your tracking does just that. If you deal with one bank, and they have a decent tracking program, you can track your spending using their program. If, like me, you have different bank and credit accounts, you can use something like Mint (it operates as both a computer program and an app).
You simply set it up to download your transactions automatically and update within the app/program. Most of the work is done for you. All you need to do is review the transactions to ensure they are being posted to the appropriate categories and enter in your cash spending which is super easy as the “cash withdrawal transactions” are already there, you just click and enter the category or categories of spending. And there are features to set a spending amount and compare your plan versus actual spending, set goals, tags etc. and offer some fun reports and graphs.
Pro tip – you can ‘split’ any category and break out the spending. For example, you go to Walmart and buy groceries, clothing and oil for the car. You can post the transaction as clothing, groceries and car maintenance with the appropriate amount for each. Super cool!
If you are not doing any type of tracking, give it a try. If you are doing it but not consistently, find a way to make it more consistent.
And if you are already doing it, pat yourself on the back and review the above methods to see if there is a way to improve your current system and save yourself some time.
The first step is tracking! Once you have the information, you can start to explore different financial decisions and see how they impact your bottom line. Just start with this step and see where it takes you